Monetary Policy

Federal Reserve Vice Chairwoman Alice Rivlin employed a three-letter word Monday for emphasis. "We don't see a significant slowdown in the U.S. economy as a whole - yet," she said. Yet. What a disturbingly imprecise word. If not yet, when? Tomorrow? Next quarter? Next year? Rivlin's remarks were made in context of the global financial crisis. Many Asian economies are waist deep in quicksand, the Russian economy is chin deep, and there's a good possibility Latin American countries will stumble into the muck.

On Wednesday, in her first speech on monetary policy, Janet Yellen, the new Chairwoman of the Federal Reserve, pointed out a discouraging paradox: In recent years, private-sector forecasters have been surprisingly accurate at forecasting changes in the unemployment rate, but they have been equally inaccurate when forecasting changes in the federal funds rate, the baseline interest rate controlled by the Fed. Since interest rates supposedly have...

For the first time in 30 years, the U.S. economy has pulled itself out of recession without benefit of a significant tax cut or burst of new government spending. And although the recovery has skipped some regions and left many workers without jobs - as President Clinton noted in his State of the Union address - others have hailed it as a model expansion with noninflationary growth and falling unemployment. Achieving a noninflationary recovery has been something of a Holy Grail in economic policy circles for decades.

As President Obama's trip to Beijing proved, the days when U.S. leaders could jawbone China into making major changes in economic policy appear to be gone. Not only did the Chinese brush off Obama's appeals this week, they harangued the United States for its own shortcomings. But the standoff in Beijing marked more than the changing balance of power between two countries - one riding a wave of surging growth, the other still mired in troubles. Although Obama wasn't expected to wring agreement from China's leaders, the tepid response the president got casts a shadow over prospects for reinvigorating the whole global economy.

Edwin A. Huston, the chief financial officer of Ryder System, has been named chairman of the Federal Reserve Bank of Atlanta in 1992, Ryder said on Wednesday. Huston, who lives in Fort Lauderdale, has been a director of the Atlanta Fed since 1988. The board of directors helps advise Atlanta Fed President Robert P. Forrestal, one of 12 Federal Reserve Bank presidents who set monetary policy along with the seven-person Board of Governors of the Federal Reserve. Monetary policy influences the direction of interest rates and the supply of credit in the economy.

In the final month before the 1992 presidential election, one economic enigma continues to puzzle Washington: Why hasn`t monetary policy been a bigger help to George Bush? Federal Reserve Chairman Alan Greenspan would certainly be expected to do all he could to assure Bush`s re-election. He was appointed by Ronald Reagan, reappointed by Bush and is a lifelong supporter of conservative economic causes. Yet monetary policy remained uncomfortably tight for uncomfortably long, and even now -- with interest rates tumbling to levels not seen in a generation -- the growth of key money-supply aggregates has been slow.

After nudging interest rates downward in December and January, the Federal Reserve Board's Open Market Committee is not expected to make any similar moves when it meets today to shape monetary policy. Lyle Gramley, a former member of the Federal Reserve Board and a consulting economist for the Mortgage Bankers Association of America, said it's "almost unanimous" among economists that the committee will do nothing. A decision by the committee to forgo action now would have a political dimension.

W.G. Bretz is a financial adviser in Fort Lauderdale and author of an investment newsletter, October 7, 1985

Many analysts use monetary figures to predict the trend of the stock market. The relationship is an impressive one over many years, but it is well to understand that there is not a direct connection between stock prices and monetary policy. Changes in the monetary background set the conditions under which the economy will operate. An expansive monetary policy creates a favorable environment for business and makes it easier for corporations to earn a profit. With the prospect of increasing profits, investors are usually willing to pay more for corporate shares and the stock market goes up. On the other hand, a restrictive monetary policy both raises the cost of doing business and makes consumers more reluctant to spend.

The Federal Reserve`s monetary policy is not likely to be changed at today`s meeting of the Federal Open Market Committee, analysts said. Ambiguous economic data, a recent slowing in money supply growth and problems with thrift institutions in Ohio are all cited as reasons that Fed officials will not embark on a tighter monetary policy with higher interest rates. A vote for no change in monetary policy at this week`s meeting, however, does not guarantee stable or lower interest rates, nor does it end the debate about the direction of interest rates later in the year.

In the week preceding today`s meeting of the Federal Reserve officials who set the course for monetary policy, the credit markets have been awash with speculation about whether the Fed would try to reduce the value of the dollar by lowering short-term interest rates, or continue to hold policy unchanged as it has for more than four months. The announcement on Sept. 22 that the United States and four other major industrial countries agreed on the need for a lower dollar was seen by many as a new development that would force the Fed to opt for a more generous monetary policy with lower interest rates.

When they need to set the direction for short-term interest rates, policy makers at the Federal Reserve look at all the big-picture economic statistics, such as unemployment, wages and inflation. But they don't stop there. They also look into the nooks and crannies in the nation's $13.5 trillion economy. The Fed checks out hotel occupancy rates in South Florida, the price of fish at a local restaurant and which jobs are hard to fill. The way the Fed gets this local-level intelligence is from a rather unusual set of researchers, a sort of economic detective unit.

Alan Greenspan has retired, but guessing what route the U.S. central bank will take on interest rates remains very much an American pastime. Today, new chairman Ben Bernanke will preside over one of the most pivotal Federal Reserve meetings in recent memory. The Fed has raised rates, in small increments, 15 straight times since the middle of 2004. Wall Street types are betting on Number 16 today, putting the federal funds rate at 5 percent. Then, what next? More rate increases or a pause?

By Bush administration standards, the choice of Ben Bernanke to succeed Alan Greenspan as chairman of the Federal Reserve was just weird. For one thing, Bernanke is actually an expert in monetary policy, as opposed to, say, Arabian horses. Beyond that, Bernanke's partisanship, if it exists, is so low-key that his co-author on a textbook didn't know he was a registered Republican. The academic work on which his professional reputation rests is apolitical. Moreover, that work is all about how the Fed can influence demand -- there's not a hint in his work of support for the right-wing supply-side doctrine.

It's been said that the Federal Reserve Board chairman is the second most powerful person in the United States. That's a good assessment, since the Fed chairman has the power to move financial markets through off-the-cuff remarks and to battle inflation and spur economic growth by shaping monetary policy. For the past 17 years, Alan Greenspan, who was first nominated by Ronald Reagan, has occupied the post. President Bush has asked Greenspan to stay on for a fifth term, and on Tuesday the Senate Banking Committee held a hearing on the nomination.

The Federal Reserve's chairman, Alan Greenspan, on Wednesday offered his most optimistic outlook for the economy since taking over the central bank in 1986. And he gave no indication that the Fed was at all inclined to begin raising short-term interest rates anytime soon. Bond prices moved sharply higher and stocks rose modestly after Greenspan began his appearance on Capitol Hill on Wednesday morning. In his semiannual report to Congress on monetary policy, Greenspan said "the prospects are good" for a "sustained expansion" of the economy.

For anybody wondering where interest rates are headed, the choice is clear right now. We can believe repeated assurances from Federal Reserve officials that rates can stay low indefinitely as the world economy keeps reviving. Or we can believe many managers of bond mutual funds who say that vision is pie-in-the-sky nonsense. "I think this is borderline insanity," says Joe Deane, who manages $6.8 billion in bond portfolios at Citigroup Asset Management, including the $3 billion Smith Barney Managed Municipals Fund.

Federal Reserve Board Chairman Alan Greenspan on Friday left room for the Fed to push interest rates higher if needed. Appearing before the Senate Banking Committee, Greenspan said that while previous rate increases have "substantially removed" the stimulus to economic growth, the Fed cannot rule out further rate increases. "Clearly, uncertainties regarding the economic outlook remain, and the Federal Reserve will need to monitor economic and financial developments to judge the appropriate stance of monetary policy," Greenspan told the committee.

The dollar plunged on world foreign exchanges Tuesday in its worst one-day slide in at least 14 years. Gold prices soared in response for their biggest daily gain in at least 10 years. "It was such a crazy day," said Jennie Hirshey, a spokesman for the New York Commodities Exchange, where gold for immediate delivery settled at $339 an ounce, up $35.70. The 11.7 percent increase was the largest daily jump in percentage terms ever on the exchange, although larger dollar increases have been recorded.

The recent Miami economic conference on Latin America stirred a rising chorus against the policies of the International Monetary Fund and the World Bank by a growing number of Latin American leaders. Both agencies were created after World War II to promote international monetary cooperation and stability while improving health, education and services. However, their reputations have lost much of their luster after half a century of financial stagnation in recipient nations. The international monetary community has provided hundreds of billions of dollars to developing nations.

When the Federal Reserve System's Federal Open Market Committee last voted to raise the federal funds rate on May 16 -- completing a series of six hikes that boosted it a total of 175 basis points (or 1.75 percent) to 6.5 percent -- 3-month U.S. Treasury bills and 30-year Treasury bonds were yielding 6.20 and 6.12 percent, respectively. The committee had begun this series in June 1999 because it feared that the economy was growing too fast and could trigger an acceleration in inflation.